For some people, the disappointing return from their cash ISAs can lead them to consider other options. So, if moving to another cash ISA isn’t going to make much difference what is a viable alternative? The answer could be transferring to a stocks and shares ISA – but what are the rules, the benefits and the possible drawbacks?
Many people are in the same boat – they're saving into cash ISAs, but even with their tax-free status, they're not producing the returns they'd like. So, it's a toss-up between 'grin and bear it' or trying to earn a higher rate of return by looking at investments. As well as the specific risks associated with investing, what exactly are the rules and pitfalls when it comes to investing in a stocks and shares ISA?
The reason that investments have the potential to earn you more than cash ISA savings is because your money is at risk. As much as an investment can increase in value, it can also decrease – meaning you actually lose your money.
Another thing to bear in mind with investments is that they're not something you should consider as a short-term undertaking. An investment is aimed at producing long-term growth, which may mean, in the short term, that if you tried to withdraw from an investment, you may come out with less money than you put in.
You can find out what the current limits for investing in a stocks and shares ISA are by checking out our dedicated ISAs page.
You can only open one investment ISA and one cash ISA per tax year, although you can open a new one every year if you wish, or transfer funds to keep your ISA pots in the same place.
Weighing up the risks vs. the benefits
So, it boils down to whether you feel the risks of investing are worth it. An investment decision should be a properly reasoned choice, looking at the pros and cons of the product – ultimately you must be prepared to risk losing your money.
While this may be an extreme scenario, it's not beyond the scope of possibility; and although the potential for returns on a stocks and shares ISA outweigh those on a cash ISA, it will be up to you to decide whether you are prepared to take the risk.
As paltry as returns may be on some cash ISAs at present, your money's not at risk in the same way as it would be in an investment.
You should view using a cash ISA as a method of tax-free saving for things such as an emergency fund or for a holiday – in other words, short-term savings goals. It's also appropriate for longer-term saving if you don't wish to risk your money.
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If you are unsure if stocks and shares ISAs are suitable for you, it's important that you seek the guidance of an independent financial adviser to help you make the right choice.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.